Chapter E: Enhancing social and market outcomes

E2. Taxes to improve the environment

Key points

The quality of the environment is critical to the wellbeing of Australians, not least because it underpins our standard of living. This is particularly important since past and present generations of Australians, often guided or directed by government policies, have been degrading their water, land and air, losing many native species and contributing to global climate change.

Many market activities damage the environment, but this damage is often not reflected in the market price of the goods or services these activities produce. These 'spillover' costs are one form of market failure. Government intervention, may provide an effective mechanism for protecting the environment or for making people pay for the damage they do to the environment.

Environmental taxes are among a range of options open to governments to address these spillover effects. Taxes can help deal with these problems by changing prices in a way that encourages people to reduce their contribution to pollution or to reduce their use of a natural resource. Where such corrective taxes are effective, they can be highly efficient — delivering greater environmental benefits for a given cost to the community than other forms of intervention.

However, taxes of this type can be difficult to design and implement. In some cases, regulation or other market-based instruments may be superior.

Once introduced, the Carbon Pollution Reduction Scheme (CPRS) will be the largest environmental policy intervention in Australia. Market-based mechanisms such as the CPRS are the most cost-effective way to reduce Australia's carbon emissions. The efficiency of the CPRS should be monitored, and opportunities taken to improve it, such as by recycling the permit revenue to reduce other taxes (where appropriate), removing supplementary measures, phasing out concessions such as free permits and broadening the scheme's application (as this becomes possible).